Gorman to Moynihan Vindicated as Big Banks’ Revenue Gains

By Dakin Campbell and Michael J. Moore -
Jul 22, 2013

First-half revenue at the six biggest U.S. banks climbed for the first time in four years, fueling profits and vindicating Bank of America Corp. and Morgan Stanley leaders who presided over stock slumps.

Revenue through June climbed to $215 billion from $208 billion a year earlier, excluding some accounting charges, according to data compiled by Bloomberg. The increase, the first since 2009, propelled Bank of America and Morgan Stanley’s shares close to where they were when Brian Moynihan and James Gorman became their respective chief executive officers in January 2010.

Rising revenue marks a pivot point in a U.S. banking-industry recovery that has relied on cost-cutting to bolster earnings since the 2008 global credit crisis. Unlike 2009’s gains driven by bond trading, growth this year came from more businesses, generated by stronger consumer confidence, a housing rebound and record highs for the stock market.

“Big banks are absolutely back,” said Greg Donaldson, chairman of Donaldson Capital Management, an Evansville, Indiana-based investment firm that oversees $750 million in assets. “The bleeding has stopped, and now they can spend time on figuring out how to make more money.”

Second Half

Second-half revenue probably will climb 7.1 percent to $230.9 billion combined, according to analyst estimates compiled by Bloomberg. JPMorgan, the biggest U.S. bank by assets, may reach $45.7 billion, as Bank of America, the second-biggest, reaps $43.6 billion, the estimates show.

The six banks reported $43.3 billion in total first-half profit, the most since 2007, and may struggle to top that in the second half of the year. Profit for the group is seen falling 5.1 percent to $41.1 billion, according to the average of analysts’ estimates, as loan-loss reserves that helped boost returns become depleted.

“There is definitely more health to the industry,” David Konrad, Macquarie Group Ltd.’s head of U.S. bank research, said in a phone interview. “The third quarter will be a little more challenging” because of shrinking reserve releases.

Sharpest Turnaround

Among the largest lenders, the turnaround in investor perception was sharpest for New York-based Morgan Stanley and Bank of America, owners of the two biggest wealth-management businesses.

Gorman, 55, has presided over a 44 percent gain in Morgan Stanley’s shares this year after they plunged to an intraday low of $11.58 on Oct. 4, 2011, from $29.60 when he took over as CEO. Moynihan, 53, who took over with Bank of America trading at $15.06 a share, weathered a tumble to $4.92 as almost all of that decline has been erased.

Of the U.S. banks that reported second-quarter results before July 19, more than 90 percent beat analysts’ estimates, Goldman Sachs’s Richard Ramsden wrote in a report last week. Revenue surpassed forecasts in 70 percent of cases, compared with 20 percent in the first quarter.

Lawmaker Scrutiny

Bank profits are again attracting scrutiny from lawmakers. U.S. senators quizzed Federal Reserve Chairman Ben S. Bernanke last week on whether regulators were being tough enough on the biggest banks and whether they were earning too much from trading. Sherrod Brown, an Ohio Democrat, asked if banks’ profit gains show that stricter rules aren’t hurting as much as executives had warned.

“It’s no surprise that mega-banks are doing quite well,” said Brown, who has introduced legislation with Senator David Vitter, a Louisiana Republican, to increase capital requirements for the top banks. “Yet they continue to claim that regulations -- new regulations, impending regulations -- are killing them.”

New rules proposed by the Fed and other U.S. regulators this month would raise the minimum leverage ratio for eight of the largest banks to improve their ability to withstand losses. Some lenders that aren’t yet at the threshold may need to retain earnings to boost capital.

The Fed also is reviewing whether it should continue to let banks own physical commodities. A Senate subcommittee is scheduled to hold a hearing tomorrow on the subject. A policy change could affect Goldman Sachs, Morgan Stanley and JPMorgan, the three banks that play the biggest role in those markets.

Rate Volatility

Interest-rate volatility is another challenge after Bernanke indicated in May that central bank policies that drove home-lending rates to record lows could reverse.

That has led to equity losses at lenders with large bond holdings. Bank of America’s shareholder equity declined $4.22 billion in the second quarter as the company’s bond portfolio took the biggest hit among competitors. The bulk was from unrealized losses in the securities portfolio, including a $5.73 billion drop in the value of government-backed mortgage securities, according to figures on the Charlotte, North Carolina-based bank’s website.

Mortgage lenders such as San Francisco-based Wells Fargo and JPMorgan, which leaned on home-loan revenue to buoy profits, face lower originations as rates rise.

‘Dramatic Reduction’

The increase in rates led JPMorgan CEO Jamie Dimon, 57, to warn investors about a “dramatic reduction” in the bank’s mortgage profits as refinancings slow. Refinancing volume could fall as much as 40 percent in the second half if rates remain elevated, Chief Financial Officer Marianne Lake told analysts on a July 12 call.

“There’s going to be a near-term slowdown in fee income because the mortgage-banking side clearly has been supported by refinancings, and we know those are going to slow,” Shannon Stemm, an analyst with Edward Jones & Co. in St. Louis, said in a phone interview last week. “Over the long-term, we think rising interest rates or a steepening yield curve is going to be positive for the banks.”

Second-quarter net income helped increase return on equity, a measure of profitability watched by shareholders, which has plummeted since the financial crisis to less than 10 percent at some firms. Return on equity exceeded 20 percent at banks including Goldman Sachs and Morgan Stanley before 2008.

Wells Fargo’s normalized return on equity rose to 14 percent in the second quarter, the highest since the three-month period ended September 2008, according to data compiled by Bloomberg. Citigroup’s rose to 7.2 percent, the highest since the third quarter of 2007.

Luring Investors

The promise of better returns has lured investors to bank stocks over other industries. The 81-company Standard & Poor’s 500 Financials Index gained 26 percent this year, outpacing the 13 percent advance for the S&P 500 Utilities Index, and the 8.5 percent rise in the S&P 500 Information Technology Index.

That’s helping bankers’ confidence as they consider whether to start boosting compensation. Morgan Stanley’s Gorman said that while large banks probably won’t make the “irrational” mistakes of the past, Wall Street pay is likely to rise along with profitability.

“Comp should be a reflection of returns for shareholders, so there’s no absolute level” that should be targeted, Gorman said in a July 18 Bloomberg Television interview with Erik Schatzker. “As all of the banks are recovering, shareholders are starting to get better returns and compensation will reflect that and reflect market competitive pressures.”